Sony’s New Content Play

Sony Corp. has agreed to buy Bertelsmann AG’s half of their jointly-own venture Sony BMG Music Entertainment, placing a valuation of $1.8 billion on the recorded music company (via the Wall Street Journal).

This is another move in Sony’s plan to provide a vertically-integrated chain of media content, software services, and hardware devices — a technique that has been hugely successful for Apple with that company’s iTunes store, Mac computers, and iPod and iPhone mobile devices. As noted previously, Sony’s past history in this arena has not been good. The company’s previous attempts at integrating its content, services, and devices have generally failed due to Sony’s tendency to “go it alone” rather than integrate with other vendor’s products or support industry standards, along with their efforts to protect their content with overly Draconian restrictions.

However, as also noted in the previous post, Sony CEO Howard Stringer seems to be aware of his company’s past missteps in this regard, and Sony may just get it right this time.

There’s another aspect of the Sony announcement that is encouraging. It demonstrates Sony’s faith in the value of musical content. Despite the downturn in sales of CDs — which, as the Journal points out, as not been offset by the increase in revenue from digital downloads — music content still has value. While Sony is picking up the other half of Sony BMG for only $900 million, the acquisition demonstrates a belief that the company can generate a profit from music sales. Sony hopes to add additional value by integrating its media, software, and hardware businesses, as well as leveraging new distribution channels such as licensing music for cell phone ringtones, movie soundtracks, and video games. If Sony — and others in the space — are successful, it will provide musical artists with access to new channels to generate revenue from their work. That’s a good thing for all of us.

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3 thoughts on “Sony’s New Content Play”

I had never thought about the “devaluation” of music, a coin-side away from the last issue you mentioned about Sony “valuing” music.

I have not bought a physical CD in over a year, and thinking about it critically, not because I don’t see value in it, it’s just that everywhere I’d go to buy a CD is a couple of bucks more expensive than the equivalent digital download from iTunes or elsewhere in the cloud.

But what happens if Apple decides to lower the price of all it’s albums by $1? That’s gotta have an enormous impact on the music-ecology/economy. Then again, is Apple even in control of the price of those albums?

To respond to your second question first: Apple has an enormous amount of control over the pricing of digital media — a fact which has not pleased either recording companies or television and movie studios. Apple’s strategy of “uniform” pricing — selling all songs for 99 cents, for example — is highly favored by Jobs and company, but most record companies would prefer to have the option to charge more for current hits.

These differing points of view have created a fair amount of tension between Apple and media companies. See the 2005 article from AppleInsider regarding the music industry’s displeasure over uniform pricing.

NBC Universal went so far as to cancel its contract with Apple and remove its content from iTunes, in part over the issue of pricing control. Ars Technica quoted Apple as saying, “Apple declined to pay more than double the wholesale price for each NBC TV episode, which would have resulted in the retail price to consumers increasing to $4.99 per episode from the current $1.99.” See the coverage from Ars Technica and the New York Times
Some recent moves, such as charging a higher price for music without DRM, have created some divergence from the one-size-fits-all pricing scheme. But, in general, Apple has held the line on uniform pricing.

Because of its distribution clout, Apple has a high degree of control over media pricing.

The question of the value of media content is more complex. As noted in the Wall Street Journal article cited in the original post, music sales have been in decline for several years. The Journal states that “the value of recorded music shipped to U.S. retailers fell to $7.9 billion, according to the Recording Industry Association of America, off 45% from its 1999 peak of $14.5 billion.” CD sales are way off — down another 16% so far in 2008 according to Nielsen SoundScan.

You might ask, “But haven’t digital downloads picked up the slack?” Not according to the article, which states that “using a formula to convert individual online song sales into a rough equivalent number of albums, music sales are still down 4.7% for 2008 through July.”

Why this is the case is less clear. The recording industry has claimed that it is largely due to unlicensed online distribution through file sharing networks.
I’ve long held the believe that, to some extent, CD sales were displaced by DVD purchases. The decline in CD sales was largely coincidental with the rise of DVD as popular home entertainment medium. I have no data to support this theory, but I wonder whether consumers have a more-or-less fixed amount of money to spend on home entertainment content, and many now choose to purchase DVDs of movies rather than audio CDs. (I’d love to see some research on this.)

To the extent this is true, it indicates that diversified media companies that have both music recording and movie divisions (like, for example, Sony) may be best equipped to ride out the current storm until the clouds clear and the new business models become more firmly established.